1960 (9) TMI 4 - SC - Income Tax

Whether the fact that Vijaylaxmi Cotton Mills was entitled to exemption from income-tax from the Cambay State by virtue of the covenant entered into by the Nawab of Cambay entitles the present appellant to exemption from income-tax from the Government of India? Whether after the accession of the Cambay State to the Dominion of India somebody having a contractual right which could be enforced against the Cambay State was entitled to enforce it against the Government of India in the Indian courts? Held that - It is apparently in view of this state of things that no case of recognition by the Dominion of India or the Union of India of the right to exemption was made in the petition before the High Court. In our opinion the High Court rightly dismissed the petition. Appeal dismissed.

Issues:
1. Dismissal of petition under article 226 of the Constitution of India by the High Court of Bombay.
2. Entitlement to exemption from income-tax by the appellant company.
3. Enforcement of contractual rights against the Government of India.
4. Recognition of exemption by the Dominion of India.
5. Assessment of tax by the Government of India.
6. Interpretation of the Taxation Concessions Order, 1949.

Analysis:

The appellant, a company incorporated under the Indian Companies Act, appealed against the High Court of Bombay's dismissal of its petition under article 226 of the Constitution of India. The appellant sought exemption from income tax based on a covenant made by the Nawab of Cambay in favor of the Vijaylaxmi Cotton Mills Ltd. The question at hand was whether the appellant, as the successor of the Mills, was entitled to exemption from income tax from the Government of India following the merger of the Cambay State. The court emphasized that the contractual rights against the Cambay State could not be enforced against the Government of India post-merger, citing the principle that such rights could not be enforced in a court of law.

The court referred to the Dalmia Dadri Cement case, highlighting that clauses in treaties providing for the recognition of existing rights post-sovereignty transfer were considered acts of State and could not be enforced in a court of law. Despite the appellant's argument regarding recognition of exemption by the Dominion of India, the court found no evidence to support this claim. The court noted that the appellant failed to provide material supporting the alleged recognition, and the mere absence of tax assessment during a specific period did not constitute recognition of exemption.

The court also addressed the interpretation of the Taxation Concessions Order, 1949, emphasizing that the Government of India retained the discretion to allow or disallow exemptions granted by acceding States. The court concluded that the High Court rightly dismissed the petition, leading to the dismissal of the appeal with costs. The judgment underscored the principle that post-sovereignty transfer, contractual rights against the predecessor State could not be enforced against the new sovereign, highlighting the limitations on enforcing such rights in Indian courts.

Judgment:
The Supreme Court dismissed the appeal, upholding the High Court's decision to reject the petition seeking exemption from income tax based on a pre-merger covenant, emphasizing the inability to enforce contractual rights against the Government of India post-sovereignty transfer.

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